Beyond Myths: Understanding the Minister’s Housing Allowance

Ordained ministers can claim a portion of their income as a tax-free housing allowance—a valuable benefit. However, the tax rules around it can be confusing. Misconceptions can lead to missing the full range of this important benefit or costly mistakes. But when we replace hearsay with understanding, ministers and administrators alike are better equipped to steward resources wisely. Let’s debunk five common myths.

Myth 1: I can choose how to calculate my housing allowance.

Reality: You can’t choose the method. The IRS uses a three-part test to determine how much of your income qualifies:

1. The amount officially designated in advance and paid to you as a housing allowance by your employer (or from a church pension plan if retired).
2. The amount you actually spent on eligible housing expenses.
3. The fair rental value of your furnished home, plus utilities.

You can only claim the lowest of these three amounts. For example, let’s say your church-designated housing allowance is $25,000, your actual housing expenses are $20,000 and the fair rental value and cost of utilities are $30,000. You can only claim $20,000. Because you received $5,000 more in income reported to you as a housing allowance, you would have to declare that amount as excess housing allowance on your tax return and include it in your taxable income.

Myth 2: I must report my housing allowance to the IRS when I retire.

Reality: Retirees don’t report the housing allowance itself—only the taxable portion of their income after subtracting eligible housing expenses. 

Income that you earn from a church pension or retirement plan that is eligible for treatment as a housing allowance is generally reported to you on IRS form 1099R. When MMBB issues these forms for its retirees, we note that the taxable amount is not determined because only you can determine how much is taxable after you apply the IRS rules for calculating your houslng allowance. 

For example, if you receive $30,000 from a church retirement plan and spend $20,000 on housing, you report only the remaining $10,000 as taxable income. You don’t need to report the $20,000 as housing allowance, but you must keep records to support it.

Myth 3: I can only claim housing allowance from one source.

Reality: You can claim housing allowance from multiple sources of clergy income, including:

• Multiple ministry jobs
• Eligible income from church-based retirement plans such as MMBB’s
• Part-time or bi-vocational ministry work

However, you cannot claim it from secular employment. The total amount claimed must still follow the IRS’s three-part test.

Myth 4: My spouse can claim housing allowance from my account after I die.

Reality: The housing allowance is not inherited. Only the minister who earned the income can claim the housing allowance. If you pass away, your spouse may still receive income from your church plan, but they cannot claim it as housing allowance—even if they are also a retired minister.

Myth 5: I can’t claim more than 50% of my salary as housing allowance.

Reality: There’s no IRS limit on the percentage of your income that can be designated as housing allowance.

In fact, some bi-vocational ministers at small churches claim 100 percent of their church income this way. However, doing so may affect your ability to contribute to an employer-sponsored retirement plan, so it’s wise to consult a financial advisor before considering this approach.

For more details, refer to IRS Publication 517. If you have specific questions, speak with a qualified tax professional. You can access this document on the official IRS web site (https://www.irs.gov/publications/p517).

As we peel back the layers of housing allowance myths, one truth becomes clear: knowledge is power. In the end, the housing allowance isn’t just a line item on a tax return —it’s a reflection of how faith communities support those who serve.